AUTs may need to be licenced to continue operating

In an ironic twist some of the fund managers who have established Australian unit trusts to get around tax laws may now be facing a major compliance issue with authorities across the Tasman.

Thursday, February 26th 2004, 4:52PM

Good Returns understands that Australian Unit Trusts (AUTs) must be licensed under the Financial Services Reform (FSR) laws which come into effect on March 10 otherwise they are declared as illegal offerings.

Enquiries show a number of New Zealand-based funds are either unaware of this or haven’t done anything about getting a licence.

Australian Investment and Securities Commission FSR head Pauline Vamos says if a fund hasn’t started down the licensing track by now there is no way that they will be compliant when the regime starts in less than a fortnight.

“If they need a licence and don’t have a licence then they are operating illegally under Australian law and that is a criminal offence.”

ASIC can apply a range of penalties including winding the fund up and fining directors.

New Zealand managers have said they don’t need a licence as they don’t offer products in Australia.

That, Vamos says, is not a relevant issue. She says if the fund is carrying out a “financial service” in Australia it is subject to the FSR regime.

“The customers don’t have to be here (in Australia),” she says. “It’s where the business is.”

She says the question managers need to ask is: “Am I carrying out a financial service in the Australian jurisdiction?”

“If the answer is yes they probably need a licence.”

Investment Savings and Insurance Association chief executive Vance Arkinstall disagrees with the ASIC interpretation. He says that the FSR legislation was developed in Australia to protect Australian consumers and it doesn’t apply to funds offered solely in New Zealand.

Arkinstall says the key is whether the AUT is providing a financial service to Australian consumers, not whether it is conducting a financial services business in Australia.

He says it’s “more than likely these products (AUTs for New Zealand) don’t require registration under FSR.”

Arkinstall’s argument is supported by managers spoken to by Good Returns who haven’t sought a licence.

“We are comfortable that the vehicles we are offering would not come under the (FSR) regime,” New Zealand Funds spokesman Richard James says.

Not all Australian-based funds appear to be caught up in this issue. Many of the funds that are sold in New Zealand are also on-market in Australia and consequently have been through, or are going through, the licensing process.

This issue also raises an interesting conflict. New Zealand managers have established AUT’s to get around tax issues. Under the tax law these AUT’s have to be controlled and managed in Australia. However, some of the arguments put up by managers for not seeking a licence is that the funds don’t operate in Australia and therefore aren’t subject to that country’s compliance rules.

There is some debate over this interpretation. For instance United Kingdom-based listed investment companies are popular in New Zealand. Because they are domiciled in the United Kingdom they are subject to that country’s jurisdiction. Using this example it would appear that AUT’s are subject to the FSR regime, unless some sort of exemption was granted.

Arkinstall says this argument isn’t necessarily correct as the UK funds are also offered in the UK.

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